Asia has more to gain from investment banking woes

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Some older Slovenians can remember belonging to three different countries even though they never left their village, so many times was the country occupied during the Second World War. A similar tale can be told of my local ATM in Singapore. It began life as part of ABN AMRO, then became an RBS machine and is now one of ANZ’s many ATMs across the city state.

The fate of that ATM tells the story of Asian banking, with the retreat of the international banks and the rise of the region’s local lenders. When the global financial crisis struck and the global banks ran into trouble, the consensus was that this was a unique opportunity for local banks to turn themselves into regional players. As the story of my local ATM shows, local banks have certainly enjoyed some successes.

But what about investment banking? Their success there has been less clear, because their expansion opportunity has come at a time when the industry is shrinking.

Asia’s capital markets need to keep growing if they are to sustain the region’s broader rapid economic growth, but the role of the financial markets in any given economy – regardless of size – is under pressure from a global re-regulation in the wake of the last financial crisis.

Given that this retreat of international banks from local markets is such a rare occurrence, Asia’s banks have missed the opportunity they grabbed so well in the retail space.

Local banks have successfully ramped up lending across the region but not done anywhere near as well in international bonds and equities. In the loan market (ex-Japan), for instance, Standard Chartered and HSBC are the only international banks in the top 10, and those banks are famously effective local lenders in many of Asia’s markets. In the G3 bond market the story is the opposite. All top 10 banks in this space are international players, with HSBC and Standard Chartered this time the only banks with any local pretence on the list. The Asian equities league table is even more international, without either HSBC or Standard Chartered to offer even a hint of local flavour.

Given that this retreat of international banks from local markets is such a rare occurrence, it is tempting to conclude that when it comes to investment banking, local banks have missed the opportunity they grabbed so well in the retail space. Or to conclude that growth in investment banking simply is not possible in the current economic and political climate. Or to conclude that while local banks have used their balance sheets to enter local markets, they still do not have the skills required to push into the investment banking sphere. If they simply aren’t interested in the chance of a capital-free pay-day, then they should be.

There is truth in all of these analyses. Broadly, two factors have driven international banks from Asia: their own financial troubles and the much tougher capital and regulatory requirements that Basel III is imposing. The first is, presumably, a temporary problem, but the latter is longer-term issue.

If financial troubles were the sole reason for international banks withdrawing from Asia or at least scaling down their banking operations then local banks could indeed be accused of being too slow to seize their opportunity. After all, international banks would just repair their balance sheets and return stronger than before.

However, the regulatory constraints that Basel III is imposing on banks, especially with regards to capital requirements and loan tenor, look likely to keep many international banks away for quite some time and make operations in Asia less viable. These costs are imposed on all banks, of course, but Asia’s banks have the money to deal with them more easily.

This means the window of opportunity for Asia’s local banks – in both the retail and investment banking sectors – will be open for much longer that appeared likely when the global crisis first hit. Local banks have more time than is generally realised to pursue their regional ambitions, and they can now do so while benefiting from strong capital markets growth in their home markets.

While local banks like ANZ, DBS and CIMB have so far clearly been successful in pursuing their regional ambitions, the growth of the local currency markets is a bigger driver than the retreat of international competitors. As foreign banks withdraw from many local markets, local banks are free to press home their advantage from being able to fund themselves cheaply in their home markets.

That does not mean that local banks can relax, but it does mean that they have the space to formulate proper expansion strategies rather than marching across borders and into balance-sheet blunders – one important reason why local banks, such as those from Australia, have failed in their previous attempts at regional expansion.

Asia’s local banks are well placed to use their balance sheets to fulfil their regional ambitions by filling the void left by the international banks. However, they have yet to prove that they can win market share through their sophistication, intellectual capital and market know-how, rather than just the more old-fashioned form of capital.